September 2008

Currently, Britain gets three-fourths of its electricity from natural gas, coal, and nuclear power. But domestic production of natural gas in the North Sea has peaked and is declining rapidly, and the Labor Party intends to retire by 2016 coal and nuclear power plants that now generate a third of Britain’s electricity. The plants will be shut down largely to comply with European Union environmental regulations.

To keep the lights on, the Labor Party plans to rely on renewable energy sources, which the government promises will generate 40 % of Britain’s electricity by 2020.

However, a number of recent studies cast doubt on the feasibility of Labor’s 2020 target. In July, the non-partisan Renewable Energy Foundation released a report warning that “a near fatal preoccupation with politically attractive but marginal forms of renewables seems to have caused a blindness towards the weakening of the UK’s power stations.” The report predicted steep increases in energy bills.

Last week, Iain Fells, emeritus professor of energy conversion at the University of Newcastle, issued a report, “A Pragmatic Energy Policy for the UK,” which states that the 2020 renewable energy targets were “demonstrably unattainable.” Prof. Fells warned of massive, disruptive blackouts if Britain continued with its current energy policy. 

In trying to shame the Congress into expensive-energy climate policies, global warming alarmists are abetted by European leaders, who routinely admonish countries like the United States, Japan and Canada for not keeping up with the EU’s efforts on climate change.

The problem with this line of reasoning employed by alarmists and Eurocrats alike is that the EU’s marquee climate policy—the Emissions Trading Scheme(ETS)—is a disaster.

The ETS is a cap-and-trade policy that works by having government assign emissions quotas (caps) to thousands of industrial users and suppliers of energy. As the cap shrinks, companies would have to find new ways to cut their carbon footprint. In any given year, if a company's emissions exceed its quota, it could avoid a penalty by purchasing surplus emission rights from a business that beat its target. The entire point of a cap-and-trade policy is to make businesses and consumers pay for carbon dioxide emissions. Because carbon dioxide is analogous to energy use, a cap and trade increases energy prices.

The EU ETS occurs in three phases: phase 1, 2005-2007; phase 2, 2008-20012; and phase 3, 2013-2020. Phase 1 was an abject failure, owing to a gross misallocation of free carbon emissions credits that led to a meltdown in their price, from 40 dollars a ton to 40 cents a ton. At that price, there was no incentive for companies to reduce emissions, which is why Europe’s greenhouse gas output increased by 2% during phase 1.

Phase 2 is supposedly much tougher than phase 1. Emissions caps have been slashed and the penalty for non-compliance has been increased significantly. That said, Phase 2 began only recently, in mid 2008, so it is still unproven.

In any case, EU leaders have postponed significant emissions cuts until phase 3 because they want to first negotiate an international climate change treaty to succeed the Kyoto Protocol, which is set to expire as phase 3 begins, in 2012. Otherwise, EU leaders would subject European industries to higher energy prices, and therefore a competitive disadvantage in the global marketplace.

For phase 3, EU leaders have promised to expand the ETS to energy intensive industrial sectors that now enjoy exemptions from carbon trading, like steel and aluminum manufacturing. They have also promised to auction nearly all the emissions credits, whereas governments can only auction up to 10 % of the credits during phase 2, and they could auction only 5 %  of the credits during phase 1 (only four of the 25 EU countries opted to auction credits in phase 1).

But Phase 1 is already in jeopardy, four years before it is slated to begin. Yesterday, the Financial Times reported that Germany, the EU’s largest economy, has indicated that it will opt-out of the next phase of the EU ETS, by granting heavy industry free carbon permits after 2013. The article quotes Merkel as saying that she “could not support the destruction of German jobs through an ill-advised climate policy”.

The auctioning of permits was supposed to ensure that the sort of misallocations that plagued phase 1 of the ETS could never occur again. If businesses have to pay to emit, then they would have the incentive to reduce their carbon footprint regardless of what their cap was.

Now Germany has opted out of the emissions auction in phase 3. The rest of the EU is likely to follow. Of course, it is unlikely that a plan to fight climate change can work if it excludes the largest emitters of greenhouse gases thought to cause rising temperatures.

EU climate policy is described as a model for the world to emulate, but it’s actually a warning for the world to heed. The ETS has demonstrated that “doing something” about global warming is expensive and difficult. It also indicates that states are unwilling to bear much of a burden to solve the supposed climate crisis.

For those of you ill-acquainted with T Boone’s plan, here’s how it works: (1) T Boone  invested heavily in wind and natural gas; (2) Pickens wants the federal government to force consumers to buy electricity generated from his wind turbines, so that they use less of his natural gas; and (3) he wants the federal government to force consumers to use his natural gas “saved” (displaced) by his wind power to fill their gas tanks, so that America can become free from its “addiction” to foreign oil.

There are a number of reasons why the plan is a bad idea. For one, the rationale for T Boone’s plan–America’s “dependence” on Middle Eastern oil–is a canard. In fact, Pickens’ true motivation is to get very, very rich.

One of Lehman Brothers’ managing directors is Theodore Roosevelt the Fourth, the most prominent Republican environmentalist in the country.  Roosevelt serves as chairman of the board of the Pew Center on Global Climate Change, as vice chairman of the Wilderness Society, and as a board member of several other environmental pressure groups.  He was chosen to give the keynote address on environmental issues at the 2000 Republican Party Convention in Philadelphia.  And most deliciously, Roosevelt is on the board of the Alliance for Climate Protection, which was founded and is chaired by former Vice President Al Gore and is behind the $300 million “We Can Solve It!” public relations campaign. Gore’s green investment fund, Generation Investment Management, relied on Lehman Brothers for investment advice. Perhaps Lehman Brothers wouldn’t be bankrupt if its managing director had spent more time on company business and less time working for groups that promote the idea that energy rationing policies will be good for the economy. Just a thought.

As part of its effort to be an intellectual leader among investment banks, Lehman Brothers produced a big two-part report last year on the Business of Climate Change, which argued that companies needed to start accounting for the risks of climate change and get on the cap-and-trade bandwagon.  The report’s chief scientific adviser was Dr. James E. Hansen, director of NASA’s Goddard Institute for Space Studies and recent defender of terrorist activity directed against coal-fired power plants.  Let’s hope he got paid in stock options rather than cash.

Now, for the cheery news (comparatively speaking) from Washington.  The House on Wednesday passed another anti-energy bill by a vote of 236 to 189.  Two-hundred twenty one Democrats and 15 Republicans voted for the bill, while 176 Republicans and 13 Democrats voted against it.  The bill appears to break House Speaker Nancy Pelosi’s (D-Calif.) promise that she would never allow more offshore drilling because she had to save the planet.  It was advertised as an offshore drilling bill.  In reality, it would open some Outer Continental Shelf areas that are at least 50 miles from the coast, but permanently withdraw all areas within 50 miles, including waters surrounding Alaska that are currently not under moratorium.  The U. S. Geological Survey thinks nearly all the economically recoverable oil is within 50 miles of shore, including Alaskan waters.  In other words, open all the areas that have little or no oil, and close all the areas that probably do have lots of oil.  The bill would also cause investment in domestic oil production and refining to decrease by raising taxes on oil companies and use the additional tax revenue to pay off special interests like Boone Pickens and other producers of uncompetitive energy.

Senate Majority Leader Harry Reid (D-Nev.) said again this week that the Senate will vote on at least four pieces of anti-energy legislation in the next few days, including the House bill and the Gang of 10/then 16/now 20’s plan.  Like the House bill, the Gang’s plan would allow a tiny bit of offshore drilling and spend tens of billions of dollars on subsidizing wind and solar energy and ethanol.  But Reid is fixing it so that no amendments can be offered that would actually increase domestic oil and gas production.  The Senate may pass one or more of these bills, but it is unlikely that the House and Senate will agree on anything to send to the President before leaving town for the campaign.  The only thing they might agree on would be a bill to renew the refundable production tax credits for renewable energy because those enjoy overwhelming support among Republican as well as Democratic members.

House and Democratic leaders are thus trying to provide cover for members facing opponents in the November election who are using the gas price issue against them.  They will now be able to say that they took the tough vote in favor of offshore drilling.  Greenpeace and several other grassroots environmental pressure groups are trying to help this operation by attacking the bill as a sellout to big oil.  This might fool some people into thinking that Democrats in Congress have now caved in to public pressure on the drilling issue.